To keep , when the price of or moves in one pool, price movement needs to occur in the opposite direction in the other pool.
Much like how natural arbitrage opportunities keep the price of Bitcoin balanced across exchanges, there are natural arbitrage opportunities which keep .
Arbitrageurs can execute these arbitrage opportunities atomically without taking any market position.
The redeem strategy is used when
In strategy, the arbitrageur purchases for from their respective pools.
The arbitrageur then redeems the for directly from the market, booking a profit.
By executing the redeem strategy arbitrageurs push the prices of and up, until .
The amount of to redeem that will perfectly balance the pools can be derived by solving this equation for
- (Long Pool Reserves)
- (Long Pool Virtual Reserves)
- (Short Pool Reserves)
- (Short Pool Virtual Reserves)
- (Swap fee)
The mint strategy is used when
In this strategy, an arbitrageur mints for directly from the market.
The arbitrageur then sells the for to their respective pools, booking a profit.
By executing the mint strategy arbitrageurs push the prices of and down, until .
The amount of to mint that will perfectly balance the pools can be derived by solving this equation for
These types of strategy are best automated.
prePO will release an open-source arbitrage bot capable of executing these strategies prior to launching.